Blog by Brenda Russell

<< back to article list


Canada Keeps Key Rate at 4.25%, Says Risks Have Ebbed (Update1)

Jan. 16 (Bloomberg) -- The Bank of Canada kept its benchmark interest rate unchanged for a fifth meeting, saying the risks to the economy from an export slowdown or a housing boom have ``diminished'' and remain ``roughly balanced.''

The target rate for overnight loans between banks remains 4.25 percent, the highest since August 2001 and 1 percentage point less than the U.S. Federal Reserve's target. All 26 economists in a Bloomberg News survey had predicted no change.

``The Bank continues to judge that the risks to the inflation projection are roughly balanced, but the main upside and downside risks outlined in the October Monetary Policy Report have diminished somewhat,'' said the central bank's statement today from xml:namespace prefix =" st1" ns =" "urn:schemas-microsoft-com:office:smarttags"" />Ottawa.

Canada's economic growth slowed to a 1.6 percent annualized pace in the second half of last year, slower than the 2.4 percent the central bank predicted in October, and will accelerate to a 2.5 percent pace in the first half of 2007. Domestic demand has remained strong and exporters have made much of the adjustment to a drop in U.S. demand, the central bank said.

Bank of Canada Governor David Dodge has kept rates unchanged since May because a high dollar slowed exports, helping control inflation in an economy overstretched by record demand for new homes and energy. His next move depends on whether exports rebound this year or if there's a shift in the job market, where unemployment is the lowest in three decades.

`On Hold'

``The Bank will be on hold for a few more months at least, though we still expect rate cuts thereafter,'' Avery Shenfeld, an economist with CIBC World Markets in Toronto, said in a note to clients. The central bank is focusing more on low unemployment than on slower economic growth, he said.

Canada's economy probably grew at a 1.5 percent annualized pace in the fourth quarter, the slowest pace since the second quarter of 2003, according to the median estimate of 13 economists surveyed Jan. 2-8 by Bloomberg News. Growth will probably rebound to 2.3 percent this quarter, the survey said.

The central bank will probably cut the benchmark rate in the third quarter, the economists' poll shows. The next rate announcements are scheduled for March 6 and April 24. Dodge also holds a press conference in Ottawa Jan. 18 after releasing the broad economic forecast used to make today's decision.

Full Output

Canada's economy will remain ``near'' full output this year and next, the Bank of Canada said today. Core inflation, the central bank's preferred measure of future price trends because it excludes eight volatile items and the impact of tax changes, will slow to the bank's 2 percent target in the first half of this year.

Dodge said last month that the economy's slowdown would last longer than he had expected, after saying in November that it would be ``mild'' and ``short-lived.''

The Canadian dollar's rise to a 28-year high of more than 91 U.S. cents in May has hurt manufacturers, by making their products less competitive in the U.S. and elsewhere overseas. Canada's trade surplus with the U.S. fell to a three-year low of C$6.65 billion in October before rebounding to C$7.34 billion in November as the dollar fell to about 85 U.S. cents.

The currency, which touched a 13-month low on Jan. 11, has fallen on lower prices for Canada's exported crude oil and natural gas. Today the currency rose to 85.68 U.S. cents at 9:18 a.m., from 85.59 cents yesterday.

Oil Reserves

The western province of Alberta has the largest oil reserves outside the Middle East, and energy companies have scrambled to find workers to build pipelines and refineries. That has boosted wages and lowered the jobless rate to 6.1 percent in December, which matched a 31-year low set in May.

Consumers have spent their new paychecks on new homes, driving prices up 11 percent in November from a year earlier. Dodge has said consumer spending and home prices create the risk that inflation may move above his 2 percent target.

The consumer price index excluding eight volatile items such as fruit and gasoline rose 2.2 percent in November from a year earlier, led by food and shelter costs. Permits for new buildings rose to a seasonally adjusted record C$6.3 billion in November, suggesting housing costs may increase further.

Central bankers ``aren't going to reduce rates until they see the core inflation rate below the 2 percent level,'' Dale Orr, managing director of Canadian economic research in Toronto for Global Insight, a forecasting firm, said before today's announcement.

To contact the reporter on this story: Greg Quinn in Ottawa at .